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1、CHAPTER 8 PERFECT COMPETITION (6e)In chapters 8, 9, and 10 we will be studying different types of industries:(1) perfect competition (Ch. 8)(2) monopoly (Ch. 9)(3) monopolistic competition (Ch. 10)(4) oligopoly (also Ch. 10)An industry consists of all firms that supply output to a particular market.
2、Market structure: This term refers to the important features or characteristics of a market, such as the number of firms (many or few), the similarities or differences of the firms products, the ease or difficulty of entering or leaving the market, the manner in which firms compete, and the degree t
3、o which firms dominate the market by means of price, output, or other factors.I. Introduction to Perfect CompetitionA. Features of Perfect Competition1)2)3)4)5)As a result of the above features, each firm in a perfectly competitive market is a price taker: the price is determined by market supply an
4、d demand conditions, and each firm just “takes” and charges that price. The firm may supply any amount of output at that price, and will seek to supply the output that maximizes its profit.B. Demand Under Perfect CompetitionEx. 1The market price of $5 is determined by the market S and D (panel a). E
5、ach firm “takes” that price and can sell as much as it wants at that price. This is because customers demand the firms product as long as the firm charges the market price. So the firm faces a horizontal (perfectly elastic) demand curve at the market price (panel b).II. Short-Run Profit Maximization
6、Remember that the goal of the firm is to maximize economic profit. There are two ways to find the amount of output that will maximize the firms profit: the “total approach” and the “marginal approach.”A. The “Total Approach” to Profit Maximization: Total Revenue minus Total CostTotal profit = total
7、revenue - total cost = (P x Q) - (FC + VC) In perfect competition, the firm has no control over price; the firm can control quantity. Thus, the firms choice of output level determines its total revenue and total cost, thereby determining its profit.There are three possible relationships between TR a
8、nd TC:If TR TC, the firm has a profit. The firms goal is to earn the largest profit! Total profit is maximized when TRTC by the greatest amount.Ex. 2, columns 1,2,3,4,and 7:Column 7 shows the firms losses and profits. Total profit is maximized when TRTC by the greatest amount; this occurs at an outp
9、ut of 12 units, which is thus the profit-maximizing level of output for this firm.Ex. 3, panel (a):Graphical depiction of the “total approach”TC curve has the shape we saw in Ch. 7.Total revenue for a perfectly competitive firm is a straight line beginning at the origin; in this example TR rises by
10、$5 for each unit sold.This firm can earn a profit by producing any output from 7 to 14 units. Total profit is maximized when TRTC by the greatest amount, which occurs at 12 units.B. The “Marginal Approach” to Profit Maximization: Marginal Revenue Equals Marginal Cost in EquilibriumWe can also determ
11、ine the firms profit-maximizing level of output by looking at marginal revenue and marginal cost.Definition of marginal revenue (MR):MR = TR Q of outputEx. 2, column 2:In perfect competition, each unit sold is sold at the market price, so in perfect competition, MR = P.Definition of marginal cost (M
12、C):MC = TC Q of outputEx. 2, column 5:As we saw in Ch. 7, MC falls first, then rises. (See Ch. 7 for a review of MC and why it “behaves” as it does.)Looking at Ex. 2, columns 2,5, and 7, we see that:As long as MRMC, the firm can move toward the maximum profit by increasing its output.When MR=MC, pro
13、fit is maximized, so the firm should not change its level of output.When MRMC, so the firm should produce these units.At the 12th unit, MR=MC, so the firm should produce the 12th unit.Beyond the 12th unit, MRMC, so the firm should not produce those units.So we know that for this firm, profit is maximized at 12 units. But how do we calculate the firms profit from a graph like Ex. 3, panel (b)?Remember thatTotal profit = TR - TCTo find the profit per unit, divide each term in the above equation by Q:Total profit Q = (TR Q) - (TC
